PRIFYSGOL BANGOR

BANGOR UNIVERSITY
ARHOLIADAU DIWEDD SEMESTER 2
END OF SEMESTER 2 EXAMINATIONS

MAI 2013
MAY 2013

YBB GRADD MEISTER

BBS MASTERS DEGREES
AMSER A GANIATEIR:
TIME ALLOWED:

2 AWR
2 HOURS

ASB4406/ASB4806 Financial Analysis

NI CHANIATEIR CYFRIFIANELLAU Y GELLIR EU RHAGLENNU
NO PROGRAMMABLE CALCULATORS ARE PERMITTED.

Answer question one (compulsory) AND any other question (all questions
carry equal marks)

SECTION A ANSWER QUESTION ONE (COMPULSORY QUESTION)

Question 1 Answer both parts a) and b)
a) The reformulated annual accounts for TFQ Ltd. are given below for the year to 31 December
2008 and 31 December 2012. The financial statements show that Return on Common Equity
stood at 21% in 2008 and 1% in 2012. By analysing the drivers of earnings based on the
financial statement data provided, you should explain why profitability has increased and the
key drivers which have caused this.
31/12/2008
Net operating assets (NOA):
Operating assets
Cash
Accounts receivable, less allowance for doubtful account
Inventories
Property, plant and equipment, net
Other assets
Total operating assets
Operating liabilities
Accounts payable
Income taxes payable
Other liabilities
Total operating liabilities
Net operating assets (NOA):
Net financial assets (obligations) (NFA/NFO):
Financial assets
Short term investment
Total financial assets
Financial liabilities
Current portion of long-term debt
Long-term debt
Preferred Stock
Total financial liabilities
NET FINANCIAL OBLIGATIONS (ASSETS)
less minority interest
Common Shareholders' Equity (CSE)

31/12/2012

825.00
845.00
4966.00
14147.00
2056.00

424.00
909.00
4902.00
13929.00
2275.00
22839.00

3528.00
220.00
5925.00
9673.00
13166.00

666.00

22439.00
3213.00
341.00
5957.00
9511.00

9511.00
12928.00

654.00
666.00

1287.00
7247.00
0.00

654.00
1256.00
7420.00
0.00

8534.00
7868.00
2.00
5296.00

8676.00
8022.00
74.00
4832.00

Operating Income
Revenues
Cost of sales
Gross margin
Operating expenses
Other operating income (expense)
Operating income from sales(before tax)
Taxes
Tax as reported
Other tax adjustments
Tax on net interest
Operating income from sales (after tax)
Adjustment: Dirty surplus items
Equity Earnings
Operating Income (after tax)
Financing Expense (Income)
Interest expense
Interest income
Other interest adjustments
Net interest expense
Tax benefit from Net Interest Expense
Preferred dividends
Net Financial Expense (after tax)
Minority interest
Comprehensive income to Common

31/12/2008

31/12/2012

82189.00
63927.00

76733.00
58958.00
18262.00

16146.00
68.00

17775.00
15634.00
-1054.00

2184.00
601.00

1087.00
532.00

127.81

123.74
1455.19

-7.00
0.00

431.26
0.00
0.00

1448.19
457.00
0.00
-7.00
450.00
-127.81

431.26
508.00
0.00
-10.00
498.00
-123.74

322.19
17.00
1109.00

374.26
-13.00
70.00

(35 marks)

b) Why are reformulated financial statements necessary to discover operating

profitability? By using examples, differentiate between permanent and
transitory earnings.
(15 marks)
(Total = 50 marks)

SECTION B - ANSWER ONE QUESTION ONLY

2. Answer both parts a) and b):

a) Critically appraise why analysis of accounting quality is an important

component of financial statement analysis. Define the concept of accounting
quality as part of your answer.
(25 marks)

b) By giving examples, explain circumstances where companies are more likely

to manipulate reporting earnings.
(25 marks)
(Total = 50 marks)
3. Answer both parts a) and b):
a) At the end of its financial year 2012, an analyst made the following forecast for Aled
Ltd., a company operating in telecommunications sector, for 2013 2016 (in millions
of pounds):
2013

2000
300

Cash flows from Operations

Cash Investment

2014

2352
380

2015

2532
442

2016

2522
470

Aled Ltd reported 6,222 million in short-term and long-term debt at the end of 2012
but very little interest-bearing debt assets. Use a required return of 9% to calculate
both the enterprise value and equity value for Aled Ltd. at the beginning of 2013
under two forecasts for long-run cash flows:
i.
ii.

Free cash flow will remain at 2016 levels after 2016.

Free cash flow will grow at 5 percent per year after 2016.

Aled Ltd. had 390 million shares outstanding at the end of 2012, trading at 60 per
share. Calculate value per share under both scenarios.

(30 marks)
b) Critically appraise issues related to the dividend discount model in equity
valuation.
(20 marks)
(Total = 50 marks)

4. Answer both parts a) and b):

a. The following provides GUN Ltds earnings per share and dividends per share
for the years 2013 2016.

EPS
DPS
BPS

2013
2.19
0.33
10.74

2014
2.4
0.72

2015
2.13
0.75

2016
1.41
0.81

Suppose these numbers were given to you at the end of 2012, as forecasts,
when the book value per share was 10.74, as indicated. Use a required return
of 9 percent for calculations below:
i. Calculate the residual earnings and return of common equity (ROCE)
for each year, 2013-2016.
(20 marks)
ii. Value the firm at the end of 2012 under the assumption that the
residual earnings will be 0 after 2016.
(5 marks)
iii. Based on your analysis, estimate a target price at the end of 2016.
(5 marks)
b. Explain the advantages and disadvantages of residual earnings valuation
model and what are its drivers? Define the concept of residual earnings as
part of your answer.
(20 marks)
(Total = 50 marks)
5. Answer both parts a) and b):

a) One of the fastest growing industries in the last 20 years is the memory chip
industry, which supplies memory chips for personal computer and other
electronic devices. However, the average profitability for this industry has
been very low. Using the industry analysis framework, explain all the possible
factors that might explain this apparent contradiction.
(30 marks)
b) Explain the procedures of fundamental analysis in estimating the value of an
entity.
(20 marks)

(Total = 50 marks)